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CONSUMER GOODS & RETAIL

Home CONSUMER GOODS & RETAIL Page 4

by EOS Intelligence EOS Intelligence No Comments

Infographic: Tailored Cosmetics – Customization Is a New Trend

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In the last five years, the beauty and cosmetics industry has witnessed a considerable demand for bespoke or tailored beauty products, which offer an alternative to “one-size-fits-all” cosmetics. The bespoke cosmetics companies allow customizing ingredients, colors, and fragrances, among others, to provide products tailored to an individual’s skincare routine or requirements. With consumers being increasingly selective, more engaged, and aware about ingredient and formula benefits, the appetite for customization to meet their distinct needs has grown.

Presently, the market for tailored beauty products is relatively small, dominated by small-sized players and start-ups, with a few established beauty brands such as Estée Lauder, Shiseido, Lancôme, among others, operating in the market. As demand grows, several other players are expected to venture into the market.

Despite challenges such as limited accessibility and high product prices, bespoke cosmetics market has tremendous growth potential and is certainly more than just a fad. The concept of customization catering to every individual’s requirements is increasingly luring more customers and could take bespoke cosmetics from being a novelty to mainstream sooner than later.

tailored cosmetics

Headquarter locations of tailored cosmetics manufacturers (refer to the infographic)

  • Function of Beauty and Kiehl’s – New York, USA
  • Ittsē and eSalon – California, USA
  • Cover Girl – Maryland, USA
  • Skin Inc. – Singapore
  • GeneU – London, UK
  • Ioma and Lancôme – Paris, France
by EOS Intelligence EOS Intelligence No Comments

Dual Quality of Food Products Questions EU’s Single Market Strategy

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Several countries in Central and Eastern Europe (CEE) allege that some multinational brands and supermarkets’ private-label food products sold in Western Europe are of superior quality than those available under the same brand name and packaging in their home markets. Food producers contend that they often change composition or characteristics of food products in different countries to adapt to local taste preferences. However, this practice has led to resentment among the CEE consumers who feel that food producers deliberately offer inferior quality products in CEE to save on costs. Taking into consideration the results of comparative tests (conducted by few CEE member states) indicating dual quality of food products to be a fact, European Commission has come out in support of countries complaining about double standards of food products. As European Commission is working out an approach to tackle the issue of dual quality of food products, the packaged food industry must prepare for possible impact.

Slovakia, Hungary, Czech Republic, Croatia, Bulgaria, Poland, Slovenia, Estonia, and Romania are among the countries that have voiced their concerns over dual quality of food products. These countries claim that some of the packaged food products sold in their home markets differ in composition and ingredients when compared to same brands’ food products sold in western markets, for instance, some products contain lower quality of the primary ingredient (e.g. less fish in fish fingers) or contain ingredients considered as less healthy (e.g. sweeteners instead of sugar in beverages). Some countries also complain about the difference in sensory characteristics such as taste, texture, or color.

Investigations by national institutions of few CEE countries revealed that, despite being marketed under identical packaging, many packaged food products differ in composition and characteristics across European Union (EU) member states. In many cases, food products available in CEE markets were less healthy as compared to same brand products available in western markets such as Austria, France, or Germany. In 2015, the Prague University of Chemistry and Technology tested 23 products marketed under the same brand name in Czech Republic and Germany and uncovered differences in eight products. Slovak Agriculture Ministry and the State Veterinary and Food Administration (ŠVPS) conducted a similar study in 2016 and found discrepancies in nearly 50% of the products tested. In 2017, NEBIH, Hungary’s food safety authority, compared 96 products in Hungary, Austria, and Italy. The study included multinational brands, supermarkets brands, as well as some products with similar composition but not the same brand. While 25 of these products were found to be identical, 8 products were different in composition and 30 products exhibited difference in sensory characteristics, whereas 33 products indicated differences in both.

Multinational companies contend that this is a common business practice to change the composition of the branded products as per the local preferences and demand, difference in purchasing power, local sourcing requirements, variation in production lines, etc. EU legislation requires companies to properly label ingredients, but it does not mandate sale of the same recipe under the same brand name across the EU markets. However, it is difficult for consumers to identify the difference in quality of products based solely on information presented on the label. Consumers generally expect that products of the same brands with identical packaging and appearance are the same and thus the purchase decision is often based on brand image and reputation.

The frustration and dissatisfaction is building up among consumers in these markets as they feel as if they are being unfairly treated as second-class consumers. The dual food quality issue has now come under the political radar as the concerned countries have joined forces compelling the European Commission to take necessary actions to eliminate double standards in the quality of food products sold across EU.

EU-Dual Quality of Food Products

After years of perseverant diplomatic efforts, in 2017, European Commission finally acknowledged the issue of dual quality in food products and pledged necessary action against such practices as they may lead to single market fragmentation. In September 2017, the European Commission offered a grant of EUR 1 million (~US$1.2 million) to the Joint Research Centre (European Commission’s science and knowledge service) to develop a common methodology which can be used across the EU market for comparison of products. Additional EUR 1 million (~US$1.2 million) will be offered to member states for conducting further tests and to take actions to ensure compliance.

Alongside, European Commission also released guidelines highlighting application of the existing EU food and consumer protection legislation to determine whether a brand is acting in breach of these laws when selling products of dual quality in different countries. Unfair Commercial Practices Directive (UCPD) prohibit “a misleading commercial practice if in any way it deceives or is likely to deceive the average consumer, even if the information is factually correct, in relation to the main characteristics of the product”. National authorities are directed to determine on case-by-case basis whether consumers would still buy a product of a particular brand if they were aware that its main characteristics differ from those of the product sold under the same brand name and packaging in most EU member states – if they would not, then the company can be considered acting in violation of UCPD (though such a determination will undoubtedly be challenging with regards to maintaining objectivity and common fixed criteria). European Commission, along with the help of industry stakeholders, is also preparing a new code of conduct that will include standards to improve transparency and thereby avoiding the dual quality issue.

EOS Perspective

Dual quality of food products has been proven to be a fact and is perceived as an unfair distortion of EU single market. European Commission advocates to strengthen enforcement of existing consumer protection laws, however, some of the EU member states’ representatives are demanding legislative amendments as they believe that the current laws are inadequate to tackle the issue of dual food quality. CEE countries demand that the multinational brands must standardize their food products across the EU market to put an end to the discriminatory practice. However, this would require revision of EU food legislation, a proposal relished by neither the European Commission nor the industry.

In May 2017, Hungary submitted a draft legislation to European Commission to introduce a labelling obligation to include distinctive warning on dual quality food products. However, food law experts contest that such an obligation will restrict the food producers to distribute their products freely in Hungary, unless they bear an additional cost for labelling. This conflicts with article 34 of EU’s treaty that guarantees free circulation of goods within EU. However, if a similar proposal is considered for EU, it would force the food producers to include a warning on the labels, and this could be perceived as a mark of a potentially negative marketing.

It is about time that multinational brands offering dual quality products acknowledge the intensity of the allegations. Companies must prepare an acceptable justification for the difference in quality of their products, more specifically, if their products in certain markets are of inferior quality. Companies may consider reformulating their products in CEE markets to standardize their product offering across the EU bloc. For instance, in September 2017, HiPPs, a German baby food producer, announced that it would reformulate one of its Croatia-sold products to match with the German recipe.

Rebranding is another option that the companies could explore. Products with significant difference in composition could be launched under a new brand name exclusively for that local market. Companies for whom rebranding and reformulating is not deemed feasible, should consider relabeling and repackaging their products to clearly differentiate the products across markets. For instance, Tulip is considering changing the packaging of canned luncheon meat in the Czech Republic to differentiate it from the similar product available in Germany. An unquestionable fact here is that whichever approach companies take to address the dual quality issue, it will result in additional costs, which might affect the products’ prices and make them less accessible, especially for consumers from low-income sections of the CEE population.

For the multinational brands offering identical products across EU, the dual quality issue can be seen as an opportunity. Such companies could consider multilingual labelling informing consumers that same product is sold across markets, and this approach would also help standardize the packaging and labelling across the region. Further, these companies could also benefit from a positive PR and marketing campaigns to reinforce the fact that they consider all their customers equal across EU single market.

Packaged food producers who have presence only in Western Europe are presented with a unique opportunity to expand in CEE markets. As the general perception in CEE is that packaged food products made in western EU countries are often of superior quality, the western-recipe version of a given product may be well received by the CEE consumer.

Local e-tailers as well as retailers in border cities can also be at gain. For instance, Czech e-tailers such as Rohlik.cz and Košík.cz have added special sections on their websites offering German products; likewise, supermarkets in German towns such as Altenberg and Heidenau have put up sign in two languages, due to increasing footfall from Czech cities across the border.

As the debate on dual quality of food products is gaining heat, multinational brands such as HiPPs and Tulip are already considering changing product composition or packaging to reflect the differentiation of their products across member states. Though food producers are not required to offer standard products across the EU countries, they will need to justify the difference in their products, and failure to do so may lead to legal action. The recent guidelines announced by European Commission are more of a soft warning to food producers. If the issue remains unresolved, then European Commission may consider more extreme measures. European Commission warned that if the situation does not improve, it will make the name of brands that are involved in the practice of dual quality publicly available. This might severely impact the brand image of these multinational brands in consumer’s view. Revision of packaging and labelling law is also one of the recommended alternatives that might be explored as a last resort.

by EOS Intelligence EOS Intelligence No Comments

China’s Cross-Border E-Commerce Sector Enjoying Government Support – But for How Long?

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It is a well-known fact that China, today, is the largest and fastest growing e-commerce market globally. Accounting for close to half of the global e-commerce sales, China’s e-commerce industry is witnessing a double-digit growth, rising by about 26% in 2016. Leading the growth in China’s e-commerce sector is cross-border e-commerce (CBEC), which is currently witnessing close to double the growth compared with the overall industry and is expected to continue to grow robustly over the next five years. The government has not only been charging favorable duty to promote CBEC, but has also created special customs-clearing zones in 13 cities to support cross-border trade. However, in 2016, the government came up with a new set of taxation and a list of items that were allowed to be only imported. Following a significant industry pressure, the government has pushed the implementation of these rules to the end of 2018, and it now remains to be seen whether the industry will continue to receive government support which is instrumental for it to flourish.

Cross-border e-commerce (CBEC) has been creating quite a buzz globally, and leading this global trend is China, one of fastest growing markets with respect to CBEC. A plethora of social factors such as improved standards of living, increased awareness about foreign products through greater international travel as well as access to information online, increased quality consciousness among consumers, limited options available locally (especially in product categories such as infant milk formula and health supplements) have resulted in escalated demand for international products in China. All these factors, along with the ease of buying through e-commerce and the growing tendency of Chinese people to use their mobile phones to shop, have resulted in exponential growth of the CBEC sector in the country.

China’s CBEC Industry – At a Glance

Retail Sales and Growth: The industry was estimated at US$85.8 billion in sales in 2016 and is expected to double up sales to about US$158 by 2020. The number of CBEC customers in China is estimated to rise from about 181 million in 2016 to close to 292 million in 2020.

Trade Partners and Goods: The UK, USA, Australia, France, and Italy are some of China’s largest trading partners with regards to CBEC. Cosmetics, food and healthcare products, mother and child solutions (including infant formula), clothing and footwear are the most shopped categories through CBEC.

Consumer Profile: About 65% of the customers are male and 75% are between the age of 24 and 40. Most of the customers are well-educated, with three-fourth of them having at least a graduate degree. The ticket size for about half of these purchases ranges between US$15 and US$75 (RMB100-500).

Leading Players: Most cross-border online sales are undertaken through third-party online marketplaces such as TMall Global (owned by Alibaba group) and JD Worldwide (owned by JD Group, China’s second largest e-commerce player). Global e-commerce leader, Amazon is also becoming increasingly active in China.

The government has also provided immense support to the CBEC sector, a fact that has been critical to the market growth. As an effort to weed out the illegal grey market imports and to promote e-commerce, China’s government relaxed cross-border e-commerce rules and the applicable custom rates (close to 15 to 60% depending on the item). Moreover, custom duty amounting to less than US$7.5 (RMB50) was exempted. The government also created 13 CBEC zones across the country in order to expedite custom clearing of foreign items ordered online. These zones house large warehouses where foreign brands and retailers stock items, which, upon being ordered, are put through custom clearance (under relaxed rules). This way the consumer receives foreign goods within few days of ordering it.

While this has been greatly benefiting the Chinese consumers who now have an access to a range of products that were once seemingly out of reach for the public at large, it is also revolutionizing how foreign players are operating in China. Traditionally, foreign companies (brands) required to have a legal entity in China (subsidiary, partner, or own manufacturer) to import goods through the general trade channels. These legal entities had the task to clear import customs and pay duties on goods imported into the country. However, under the CBEC channel, these foreign players are freed from the requirement of establishing a local entity before selling their goods in the Chinese market. This also relieves companies from several compliance procedures that they were required to follow in case they were entering the market through offline trade channels. Therefore, several players, who shied away from China in the past (owing to cumbersome product registration and approval process), are looking at this as their entry strategy in the market. Simpler compliance checks and reduced import taxes have also made it easy for companies to experiment and launch a host of products (on a hit and miss basis) in the Chinese market without much investment.

However, while CBEC has greatly supported the cause of promoting e-commerce and aiding international companies in accessing the Chinese markets, it has seriously hampered the business of several domestic players (especially in the cosmetics and health supplements industry) who have been protected from foreign competition in the past owing to strict import rules. Moreover, it has resulted in a major disadvantage for conventional retailers with a brick and mortar setup as goods sold through the CBEC route are levied with a lower number of taxes compared with similar goods sold through traditional trade channels in China.

Owing to these factors, in April 2016, the government revised the taxation rates for CBEC goods resulting in a marginal increase in taxes for few categories. Under the new rules, products would be temporarily levied with 0% import tariff but would be taxed at 70% of the applicable VAT and consumption tax rate, which changes based on the product category. For instance, cosmetics worth RMB500 (US$75) ordered through CBEC would be taxed 0% import tariff + VAT at 11.9% (i.e. 70% of applicable VAT rate for cosmetics – 17%) + consumption tax at 21% (i.e. 70% of applicable consumption tax for cosmetics – 30%), thereby, making the total amount equal to RMB664.5 (US$100). In addition to the changes in taxation, the government removed the waiver of custom duty of up to US$7.5 (RMB50) and set a limit of US$302 (RMB2,000) on a single transaction and of US$3,020 (RMB20,000) on purchase by a single person per year. It also released a list (termed as a ‘positive list’) of 1,293 products that were allowed to enter the Chinese market through CBEC. While the goods under the ‘positive list’ are exempted from submitting an import license to customs, few products from this list that come under China Food and Drug Administration (CFDA), such as cosmetics, infant formula, medical devices, health supplements, etc., require registration before import. This entails the same tedious registration or filing requirements required for products imported through the traditional trade channels. This greatly limits the inherent benefits of the CBEC model for these products.

While the government had initially intended and aimed for immediate implementation of these new regulations, protests and pressure from Chinese e-commerce companies and the ultimate objective of promoting the country’s e-commerce sector resulted in the government agreeing to a one-year transitional phase for these rules (which was to end in 2017). However, in September 2017, the government decided to extend the transitional period until the end of 2018 and to set up new trade zones for CBEC, reinforcing its support for the cross-border e-commerce sector. While changes in the regulation do seem to be a certainty in the future, the timeline for their introduction remains ambiguous as several industry analysts anticipate that they may get pushed off again.

Cross Border e-com in China

EOS Perspective

The cross-border e-commerce sector in China has been witnessing exponential growth and despite the looming new regulations, is expected to continue to grow at least over the next five years. While leading e-commerce companies in China (such as Alibaba group and JD group) have acted swiftly to benefit from this growing space, the greatest benefit has been for the foreign players who now have an easy access to Chinese consumers without the need of setting up a shop in the country. However, these benefits may be short-lived considering the new set of regulations. Few product categories such as infant formula, cosmetics, and health supplements (which have in actuality been the most popular categories for CBEC) will be subject to registration and filing requirements, thereby their so-called ‘honeymoon phase’ in the country is likely to end. Although a lot of products do not have to comply with registration/filing requirements and are only subject to a marginal increase in taxes (as per the new rules), this does not guarantee that future regulations will not impact their presence and sales in China. Therefore, while CBEC may be the smartest way for companies to test their products with limited investment in China, they may need a back-up plan in case the government further regularizes the industry to create a level-playing field for the traditional retail.

by EOS Intelligence EOS Intelligence No Comments

Infographic: Wine Industry Expects Healthy Growth in the Midst of Intense Competition and Demand Shifting Eastward

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Winemakers across the globe are not having an easy year. Global wine production is expected to hit a six-decade low in 2017, caused mostly by unfavorable weather conditions (frost and droughts in key European wine producing countries – Italy, France, and Spain, as well as severe fires in California). Even without the weather throwing roadblocks under winemakers’ feet, their line of business is not an easy one, challenged by tough competition, high import tariffs, and shifts in consumer demand. Wine market dynamics are changing, with several emerging trends that affect the way winemakers operate and the focus markets they increasingly cater to.

Global Wine Market

by EOS Intelligence EOS Intelligence No Comments

China Beefs up Meat Consumption Guidelines, but Chickens out of Action

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Several decades ago, meat consumption was seen as luxury by the Chinese. Fast forward to today, meat (especially pork) has seeped into the diet of the everyday Chinese man to such an extent that today China consumes 28% of world’s total meat, including half of its pork. While this showcases immense income growth, the flip-side are the escalating environmental and health issues attributed to meat consumption. This has prompted China’s National Health and Family Planning Commission (NHFPC) to issue new guidelines which ask the Chinese people to reduce meat consumption from about 60-63kg/year to about 14-27kg/year by 2030. However, without any actionable initiatives from the government (be it in the form of investments or taxes), these recommendations are not likely make a strong dent in the surging meat consumption levels.

China has witnessed a steep growth rate in meat consumption, which soared from a mere 13kg/person in 1982 to about 63kg/person in 2016. If the current trends continue, it is predicted that by 2030, the average Chinese man will eat close to 93kg/person if suitable measures are not taken to halt this growth. Owing to these consumption levels, China is one of the largest contributors to livestock agriculture-created greenhouse gases. The predicted rise in meat intake in China (by 2030) is likely to add another 233million tonnes of greenhouse gases to the atmosphere on a yearly basis. Moreover, China’s growing love for meat has also contributed to an exponential rise in the number diabetes and obesity cases, with more than 100 million Chinese suffering from diabetes at present.

To combat these growing concerns, NHFPC issued new guidelines in 2016, urging the Chinese population to reduce their meat intake to 40-75 grams per day, which translates to about 14-27kg/year from the current rate of 63kg/year, thereby aiming to reduce the meat intake to less than half by 2030. Along with these recommendations, the government has also undertaken some measures to achieve the recommended consumption levels, however, a few of them seem rather shallow to lead to the desired change.

The government, along with few NGOs such as WildAid, are trying to create awareness regarding the new guidelines. International celebrities, such as Arnold Schwarzenegger and James Cameron, have featured in videos hailing this government action and urging Chinese people to adopt vegetarianism. Moreover, the government has introduced health education in school curriculum and is promoting “health as a habit” to push life expectancy from 75 years to 79 years. A part of this campaign is to promote healthy eating and eating less meat and more vegetables.

At the same time, however, the government has been cutting down subsidies for small-scale pig farmers as well as formulating stricter environmental regulations, in order to push backyard pig farmers to either expand and clean their operations or exit the market. However, instead of curbing the industry growth, this may only result in strengthening the operations of larger players and may also lead to market consolidation.

While the government’s latest recommendations seem necessary, albeit ambitious, given the level of current actions, they seem far from sufficient to realistically curb demand for meat in the growing economy. As per local experts, NHFPC’s guidelines have received limited coverage by the media, especially in livestock-heavy regions of Shandong, Liaoning, and Inner Mongolia. China has strong cultural traditions attached to meat-eating (such as the Yulin Dog Meat festival and the Double Ninth festival), which makes it difficult to initiate change in eating habits. Moreover, at the time when the government should initiate import restrictions and taxes to curb supply of meat (which may lead to price rise and in turn probably contract demand and consumption), the government has recently re-allowed beef imports from the USA, which is clearly a counter-productive move.

This is not the first time the Chinese government attempts to deal with the issue of rising meat consumption, and if the authorities follow the same approach as before, those past efforts might be a strong indicator that the new guidelines will have a very limited impact. In 2007, the government issued similar guidelines restricting meat consumption to 50-75g a day (i.e. 18-27kg/year), however, the government failed miserably in achieving these targets, as apart from publishing the guidelines, it took no real action. Unless the government moves away from this passive, and evidently failed, approach, meat consumption is likely to continue to soar.

China Beefs up Meat Consumption Guidelines, but Chickens out of Action by EOS Intelligence

 

EOS Perspective

NHFPC’s guidelines seem to be a step in the right direction, however, in the absence of a larger and more concrete government action, these recommendations do not come across as anything more than a formality undertaken by the country’s government to please global climate campaigners. While the government announced an infusion of US$450 billion into the country’s agriculture system in September 2016, its seriousness towards these guidelines will be determined by how much of this sum will be apportioned (if any) to programs encouraging vegetarianism.

Since meat (pork/beef/poultry/sheep) farming is a large industry in China, providing key dietary ingredients for the population at large, a sudden increase in taxes or a cut down of major subsidies may not be possible. However, the government can work to fuel the desired dietary changes in a phased fashion, e.g. by starting to reduce meat imports by imposing restrictions, while simultaneously working on reducing people’s dependence on meat by promoting vegetarianism as a healthier as of life.

Although these actions may seem far-fetched, few local and large players are strategizing their future plans, mindful of these recommendations and the increased health awareness as a potential outcome of these initiatives. Since pork is the most widely used type of meat, it is likely that the intake of traditional pork dishes would be impacted the most by any actions taken by the government. Keeping this is mind, WH Group (a leading pork processing company) has already started expanding its focus to western-style products such as ham and sausages. The company expects a growing demand for such American-style foods that come with much higher margins, allowing to compensate for the potential loss of sales volume of the unprocessed, traditional cuts. The company is also diversifying into other meats, including leaner beef and lamb in their product mix, in anticipation of the growing health awareness trend.

On a final note, these guidelines alone definitely do not seem enough to stir a change in the Chinese population’s eating habits but the fact of the matter is that a change is required. It may take another decade and much greater initiatives from the government’s end to reduce the local people’s meat intake, but considering the global trend towards meat consumption reduction and the growing environmental and health concerns, it is likely that sooner or later, China will get there too. Now it remains to see if the meat farming and processing companies employ a wait-and-watch approach or proactively start investing and working towards change.

by EOS Intelligence EOS Intelligence No Comments

Can Luxury Swiss Watches Stand the Test of Time?

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Swiss watches have long been synonymous with innovation, elegance, and class. These pieces have been considered the standard of sophistication and finesse, making their producers the undisputed leaders of the luxury watch market. But as the saying goes “what rises must fall”, the rock solid foundation of this popularity is going thorough turbulent times. The industry has seen a hard time in the past two years, as Swiss-made watches exports have recently declined. We are taking a look into what has led to low exports of these watches and whether the industry is ready to take any steps to see a revival in the near future.

Swiss watchmakers dominate the luxury watch segment with close to 50% of the global market share controlled by three Swiss watch manufacturers (Swatch Group, Richemont, and Rolex). As of 2016, these luxury watches were exported across all continents – Asia (53%), Europe (31%), Americas (14%), Africa (1%), and Oceania (1%). Hong Kong, USA, and China are the top three export markets.

The Swiss watch industry has been facing difficulties since 2015, when the year ending exports by value of Swiss watches stood at US$ 21.5 billion (CHF 21.5 billion), a 3.1% decline from 2014. The situation worsened in 2016, when the exports were further 9.7% lower than in 2015, falling to the lowest level since 2011. This was mainly due to a sharp decline in sales across Asia, especially Hong Kong and China, which are among the industry’s top export markets. Hong Kong is the most crucial market for Swiss watches – its share decreased from 14.4% in 2015 to 11.9% in 2016. During the span of five years between 2012 and 2016, exports to Hong Kong reduced by 46.5%. The third largest export market, China, was also affected and observed a decline of 18.7% in value exports over the five year period. The situation has not been so dramatic in the USA. Exports share held by the USA also went down between 2012 and 2016, showing a marginal decrease of 0.45%. The Swiss watch industry, over the period of five years, also saw a fall in sales volume globally, declining by almost 13% from 29.1 million units in 2012 to 25.3 million units in 2016.

The year 2017 also did not start on a positive note for the Swiss watch industry. The first quarter of the year recorded a drop of 3.1% in unit exports to 5.6 million from 5.9 million in 2016. Similar trend was observed in the change of exports value. The industry generated US$ 4.5 billion (CHF 4.5 billion) from exports during January to March in 2017, a figure showing a 3% decrease in export value from US$ 4.6 billion (CHF 4.6 billion) in 2016 and a 11.6% lower from US$ 5.1 billion (CHF 5.1 billion) in 2015 in the first quarter. Exports to Hong Kong and USA also took a plunge during the first three months of 2017 – the value of exports for Hong Kong was lower by 0.1% and 31.6% when compared to 2016 and 2015, respectively, in the USA exports were lower by 4.2% and 18.9% in contrast to 2016 and 2015, respectively. However, China gained 16.6% (over 2016) and 7.9% (over 2015) in exports value. But this small achievement does not paint a rosy picture for the luxury watch industry for 2017. With exports taking a dive globally, the downward trend is expected to continue over the coming months.

The dip in exports to Hong Kong and China is a cause of worry. Economic slowdown in Hong Kong is one of the reasons responsible for slumping sales of luxury watches here. Hong Kong also attracts a large number of Chinese travelers each year solely for shopping purposes. The country is heavily dependent on China in terms of trade and tourism, and any drastic change in China’s economic situation affecting the buying patterns of Chinese consumers can be seen across Hong Kong as well. The launch of anti-corruption campaign in China by President Xi Jinping in November 2012 has also affected the sales of luxury watches. The campaign keeps a strict check on government officials and employees of state-owned enterprises who indulge in extravagant show-off of property, luxury belongings, or other similar expensive assets. Under the new amendments made to the campaign in 2014, both the payer and payee of a bribe are to be penalized. This has made consumers wary of buying Swiss luxury watches, among other lavish goods, as a gifting item to high rank government officials. The Swiss watch market has been hit by this policy and the impact on luxury watches sales has been negative. Another reason that has led to the decrease in luxury watches exports is the strengthening of the Swiss Franc. After the Swiss National Bank removed the cap on the exchange rate to prevent the Swiss Franc from over appreciating in 2015, importing products from Switzerland in these Asian countries became more expensive which has disturbed exports.

Swiss luxury watchmakers also face tough competition from smartwatch manufacturers. In 2016, 21.1 million smartwatches were shipped as against 25.3 million Swiss watches. The volume gap between the two types of watches is expected to further reduce in the coming years. With most of the smartwatches priced in the range of US$ 400 to US$ 1,000, the high-end luxury watch market does not feel too much competitive pressure from the smartwatch industry. It is the low-cost and mid-tier segments of the luxury watches that are facing the largest threat. Luxury watchmakers are introducing their own line of smart watches to deal with this threat posed by smartwatch manufacturers.

Luxury watch market is also not free of counterfeit products. The urge to own a luxury piece without burning a hole in the pocket is a dream of many, pushing some consumers to settle down for fake items at affordable prices. With better mechanical parts and improvement in aesthetics over the years, the fake copies have improved in quality. Every year, 40 million fake pieces are produced (against 30 million original Swiss watches), as per figures published by Federation of Swiss Watch Industry. With more fakes than genuine products available in the market, the Swiss industry needs to find ways to curb the illegal sales of counterfeit products and prevent erosion of own sales.

EOS Perspective

In the current challenging environment, Swiss watchmakers are forced to rethink their business strategies. With plunging exports, the manufacturers are focusing on introducing new products enabled with newer technologies and gradually stepping into the smartwatch market to attract buyers. For instance, Swatch Group, in 2015, launched ‘pay-by-the-wrist’ watch named Swatch Bellamy. With built-in NFC technology, the watch allows the user to pay for their purchases. Another example is Mont Blanc, part of the luxury Swiss manufacturer Richemont Group, which introduced Montblanc Summit that runs on Google’s Android Wear 2 platform. The watch is equipped with features such as heart-rate monitor but still looks like a classic mechanical watch. The watch aims at offering consumers a unique experience of wearing a smartwatch which does not resemble a typical smartwatch, a factor important for many style-oriented users.

In the midst of these risks hovering above the luxury watch industry, we believe innovation, adoption of new technology, and expanding into new markets should be the top priorities for watch manufacturers in the coming years. There is some concern about how long will it take for the luxury watch industry to revive from the current turbulent situation, but this definitely does not indicate the death knell for the Swiss watch makers anytime soon.

by EOS Intelligence EOS Intelligence No Comments

Five Technology Trends to Reshape Retail in 2017

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Today, retail and technology have become inseparable, driven by the need to digitalize services to offer convenience to shoppers and elevate their shopping experience. Retailers are slowly shifting focus towards being phygital, and to digitalization of in-store experience, supported by disruptive technologies (social, mobile, cloud, and analytics) continuously transforming the face of retail sector.

Besides enticing customers and creating a unique shopping experience, digital retail integration is increasingly simplifying supply chain management, payment systems, and tracking of inventory and sales data, among others. Some retailers are using technology to get insights into hard-to-capture customer behavior data, which is then used to take effective measures to improve sales.

Clearly, technology has become an indispensable means to empower the retail sector and will continue to do it in 2017 with innovations such as Internet of Things (IoT), smart mirrors, big data analytics, chatbots, robotics, etc., sweeping every possible domain of retail.

By the end of 2017, insights captured using big data analytics will be increasingly used by retailers to devise business strategies, which is likely to help them to stay abreast of retail trends. Big data analytics are expected to play a key role in predicting sales and trends, conducting consumer sentiment/behavior analysis, forecasting demand, achieving price optimization, and devising customized promotions.

Interactive mirror, a smart mirror that helps to virtually try-on clothes, is an interesting digital retail innovation, which is likely to gain more popularity in 2017. Interactive mirrors’ application can be customized according to the needs of individual retailers. For example, companies such as Ralph Lauren (a US-based retailer) are using these mirrors to show consumers how a particular outfit will look during different times of the day by changing the lighting of the fitting room along with providing suggestions on accessories, which are displayed on the mirror, to encourage more purchase. Companies such as Lululemon (a Canadian athletic apparel retailer) are using interactive mirrors to suggest places to exercise and provide information on healthy living. These mirrors are not only a means to attract shoppers by offering unrivaled shopping experience, but can also be used to gather consumer behavior data. With the help of interactive mirrors, Rebecca Minkoff (a US-based luxury retailer of handbags, accessories, footwear, and apparel) store was able learn that a leather jacket was tried on 70 times in a week but never purchased. Most shoppers asked for different sizes using the interactive mirror, indicating that there was a fit issue.

Chatbots, another invention to continue gaining traction throughout 2017, act like a virtual concierge service, guiding customers through the shopping process, providing detailed information on product and stock level, and allowing shoppers to place an order and track it in real time. Chatbots are also a great tool for retailers to get insights on shoppers’ tastes and preferences – for instance, all first-time shoppers on Sephora’s (a French cosmetics manufacturer) chatbot are required to take a short quiz that helps the bot know about personal preferences of a user – this information is used to recommend products. The bot also provides reviews on certain products.

In 2017, IoT is likely to become an integral technology for the retail sector to build smart stores. IoT’s significance is expected to grow in retail with about 70% of retailers in the USA ready to adopt the technology in 2017, according to a survey conducted by Zebra Technologies. IoT will be the key to interconnect in-store smart devices and sensors with Internet, which will enable better data-driven business decisions and ease of operation.

For the past couple of years, big box retailers such as Staples, Walgreens, Amazon, and Gap have been using robots for warehousing and logistics operations, but 2017 is expected to witness an increasing implementation of robotics for customer facing in-store operations as well. While use of robotics for distribution center operations will still hold importance, the launch of Amazon Go stores, Amazon’s robot-powered supermarkets, Lowe’s customer-assistance robots, etc., will increase foothold of robotics in front-end tasks such as customer assistance (we wrote about Amazon’s latest efforts to digitalize the grocery market it in our publication Amazon: Prepared to Digitalize Grocery Business in the USA? in April 2017). In the coming 5-10 years, robots can be expected to become an integral part of the complete retail value chain including both front-end and back-end operations.

Five Technology Trends

EOS Perspective

In the medium term, in-store shopping is not going to fade away due to competition from online retail, but instead it is likely to witness an upgrade with retailers enthusiastically integrating technology into physical stores. The key focus of all retailers in 2017 will be to enhance personalized customer interaction, offer innovative in-store experience that rivals the convenience of online shopping, and use the gathered insights on customer shopping patterns to conduct effective predictive analysis. To achieve these objectives, retailers are likely to use technologies such as big data, IoT, and robotics, and employ interesting innovations such as chatbots and smart mirrors to offer seamless services to attract customers as well as use these innovations to capture valuable insights on consumer behavior.

Over the years, technology has tremendously contributed to the success of retail sector – starting from browsing, point-of-sale, shipping, checkout, supply chain, to payments, and so much more. This will not change in 2017, as technology will continue to digitalize retail, with top retailers prioritizing technology to improve sales.

*key sector of operation for each retailer included in the infographic

  • General merchandise: Amazon, Tesco, Macy’s, Kohl’s, and Kroger
  • Footwear: Nike
  • Fashion (apparel, fragrance, cosmetics, sunglasses, handbags, shoes, etc.): Burberry, Rebecca Minkoff, Nordstrom, Sephora, Van Heusen, H&M, and Ralph Lauren
  • Electronics: Anker
  • Online retailer: eBay, Ocado
  • Food: Godiva
  • Home Improvement/appliance: Lowe’s
China wine market
by EOS Intelligence EOS Intelligence No Comments

China’s Wine Market: Will Challenges Crush the Growing Appetite for Imported Wines?

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Over the past decade, China’s wine industry has evolved significantly and is at the forefront of becoming one of the most promising emerging wine markets globally. Globalization and massive socio-economic transformations among Chinese population have revolutionized consumers’ preferences and taste, which in turn created demand for high quality foreign wines in the country. Imported wines have been pouring into China, with approximately one out of every five wine bottles opened being imported. In 2016, China imported 638 million (15% y-o-y growth) liters of wine, valued at US$ 2.4 billion (16% y-o-y growth). The Chinese wine buyers are enthusiastically purchasing a variety of labels across all price ranges, making it an important market for global wine sellers. However, the burgeoning imported wine industry in China faces a few impediments. Faced with stringent import regulations, supply chain impairments, language barrier, counterfeit products, and exorbitant tariff rates, importing wine into China is not a simple process. Nevertheless, importers and producers need to overcome these challenges to establish themselves in the flourishing imported wine business in China.

China is one of the ten largest wine consumers in the world with over 2,000 brands of wine sold in the country, out of which 1,500 were imported in 2015. Consumption of imported wine is the highest in tier I cities including Beijing, Guangzhou, Shanghai, and Shenzhen, which together account for 53% of imported wine sales volume. These cities are populated with expatriates, western-educated young professionals, and consumers, who prefer imported wines. France has consistently been the key wine exporter, accounting for a share of 40% in total wine imports (by volume) to China in 2016, followed by Australia, Spain, and Chile.

China’s Wine Market

Imported wines are quickly trickling down among the wealthy Chinese citizens in urban areas, as consumption of wine is considered a status symbol, influenced by westernization. Growth is further driven by youth population and growing middle class learning about foreign liquor brands and demanding imported wines. In addition, increased consumer spending and government’s promotion of wine as a healthy substitute to the traditional alcohol ‘baijiu’ have accelerated demand for wine in the country.

Despite the growing wine demand, the imported wine industry faces several challenges including dealing with high import tariff rates and circulation of fake wine, breaking through the language and cultural barrier in China, and facing the complex distribution system along with strict import regulations.

EOS Perspective

Chinese consumers are typically interested and enthusiastic about overseas goods which explains their yearning for imported wines. The growing demand for foreign wines is driving the import business, with over 24,000 wine importers present in China, located mostly in Shanghai, Beijing, and Guangzhou. Although obstacles continue to hover above the imported wine market, certain steps have been taken to ease the hassles and this could help alleviate challenges to some extent.

What steps have been taken to overcome challenges?

The Chinese government is actively trying to curb the counterfeiting issue in the country and has introduced an anti-fraud initiative called Protected Eco-origin Product (PEOP) which is a label placed on wine bottles that acts as a guarantee of authenticity by the government. Several technologies are being adopted, including radio frequency identification (RFID) tags, Near Field Communication (NFC) chips, QR codes, etc., to combat counterfeiting. RFID tags and NFC chips offering unique serial identifiers are incorporated into wine bottle’s capsule. Using an app, users can quickly check the authenticity of wine bottles.

The government is also focusing on infrastructural development of tier II cities, which is likely to improve distribution channel across these cities, resulting in better access to imported wines.

What does the future hold for imported wine market in China?

Over 2016-2019, the Chinese wine market is forecast to reach US$ 69.3 billion, growing at a CAGR of 15.4%, with imported wines likely to occupy a significant portion of the market. In near term, imported wines are likely to filter down to tier II cities, as consumers’ knowledge and preference for imported wines is growing amidst government’s efforts to make wine more accessible across these cities.

Further, the imported wine market is likely to undergo certain structural changes. Presently, the Chinese imported wine market is very fragmented, comprising several small importers focusing and operating locally within one city. These smaller importers might realign themselves by joining forces through mergers and acquisitions, in order to take advantage of economies of scale to be able to better compete on price.

Online distribution of wines is likely to gain more popularity, as China offers highly developed e-commerce infrastructure to sell products online. Consumers are slowly opting for online channel to purchase imported wines due to the availability of wide selection, transparency of information, and ease of comparing different brands with each other through information available online. Some producers started selling their wines through marketplaces such as Tmall and JD.com, as well as through specialized alcohol platforms such as Yesmywine, Jiuxian, and Wangjiu. Further, importers use delivery apps such as Dianping and ELeMe to sell imported wines.

The foreign wine market is expected to continue thriving in China and remain an attractive proposition for importers and producers. However, the key challenges will most likely persist in the market amidst other weaknesses including slow implementation of regulations, corruption, and weak administration.

Nevertheless, wine importers and producers foresee tremendous growth opportunity in China’s imported wine industry, and they are likely to continue making efforts to navigate through all obstacles, hoping to make the struggle worthwhile in the long term.

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